GLOBAL ECONOMIC NEWS: WILL CHINESE ECONOMY OVERTAKE THE US ECONOMY IN THE NEXT FEW YEARS?

Before the eruption of the global economic crisis, it had been predicted that People’s Republic of China will surpass the US economy in the year 2041 as the biggest economy of the world. Additionally, in the year 2010, People’s Republic of China surpassed Japan’s economy as the second largest economy of the world.

Beyond the headlines about the emergence of China as a powerful economy and its growing importance in the world, foreign direct investments have been flowing into the country, enticed by an illusion of a huge potential market consisting of over 1.2 billion people.

More recently, the Wall Street Bank projects that the Chinese economy will overtake the US economy as early as 2027 whereas according to the Economic Intelligence forecast (EIU), the Chinese economy will overtake the US economy on the basis of purchasing power parity by the year 2017.

In order to capture the true potential of this most promising emerging market, reputed multinational organizations rushed to set up their operations in China. Local firms, on the other hand, with support from the local government, re-structured themselves in order to protect their interests against the invasion of foreign firms.

Out of this restructuring process, a number of local companies emerged out strongly which now pose great competitive challenges to foreign MNC’s. On the contrary, the entry of foreign multinational organizations throughout the 1990’s in the Chinese market was a wake-up call for Chinese companies. While on one hand, these foreign MNC’s posed immense competitive threats to local companies, they presented opportunities for locals to learn new skills and technologies.

Challenges faced by Foreign MNC’s in Chinese Markets

Foreign Multinational Companies face serious competition in Chinese markets that are less complex in terms of market structure but are technologically very complex. Simply put, in industries where there is less market complexity and technological complexity, it is relatively easy for local firms to emulate multinationals.

The consumer electronic industry, beer industry and personal computing industry belong to this category where local firms overtook multinational companies.

In the consumer electronic industry for instance, local Chinese companies and foreign MNC’s are fiercely competing with each other by introducing innovative products. These firms competed in high end products like LCD’s, TV’s and HDTV’s for affluent Chinese customers.

Challenges faced by Local Companies

Local companies find it very difficult to compete with foreign multinational companies in industries with market complexity and heterogeneity. The consumer goods industry, for example, is largely dominated by global consumer goods producers such as P&G and Unilever that have extensive knowledge of analyzing consumer demands and offering brands that are tailored to specific consumer segments.

Furthermore, these companies also have effective distribution systems and huge advertising budgets due to which they successfully defend their dominant market share and position especially in personal care products and consumer products.

While local Chinese companies may be capable of developing a product that is tailored to regional Chinese markets, these companies do not have the skill set to develop a brand at the national level.

While on one hand, foreign MNC’s are terrified of introducing advanced technologies in People’s Republic of China which would result in a technology spill over, they are ambitious to access local (Chinese) markets and earn higher returns on their investments on the other. Local firms, on the contrary, are focused on adapting foreign technologies via various means such as alliances, imitation, acquisitions and joint ventures.

Foreign Multinational Companies in China today wonder for how long they will be welcomed in the country. While on one hand, smaller foreign consumer goods manufacturers, small retailers and lower technology companies seem to go unnoticed, larger MNC’s feel they are being monitored carefully.

Especially on companies with advanced technologies, Beijing is making bigger demands. The competition is already very intense. In order to establish a winning business in People’s Republic of China, foreign MNC’s need to plan more meticulously.

To cut it short, China has emerged as a country of outsized potential, endless ambition, and rising complexity. The relentless rise of the Chinese market remains one of the most discussed global business stories today. But how this story winds up will depend upon how well each company writes its plot and this will not be the same for all multinational organizations.

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